Tax fraud is a significant problem. Identity theft is a primary means by which tax fraud is perpetrated. Since the early 1990s, the United States federal government has lost tens of billions of dollars due to tax fraud. The United States Government Accountability Office has estimated that the Internal Revenue Service (IRS) prevented $24.2 billion in fraudulent refunds in 2013, but paid $5.8 billion later determined to be fraud. Because of the difficulties in ascertaining the amount of undetected fraud, the actual amounts could differ from these GAO estimates. Tax refund fraud often occurs when identity thieves use a legitimate taxpayer's identifying information to file a fraudulent tax return and claim a refund. The IRS identified 642,000 incidents of identity theft in 2012 alone. The foregoing does not include incidents related to “Operation Mass Mail” schemes in which identity thieves use stolen identities of Puerto Rican citizens. As of September 2012, the IRS reported approximately 436,000 incidents related to that scheme. The GAO has recommended that the IRS improve its cost estimate, provide improved metrics, and enhance their authentication processes between the IRS, government officials, return preparers, and financial institutions.
Additionally, the IRS has a complex process to attempt to collect billions of dollars in unpaid tax debts. Tax debts from FY2007 onward is approaching $300 billion, as the IRS had shelved or delayed collection of billions of dollars of tax debt. Improvements in the current three phase tax collection processes are needed to identify, track, and collect tax debt. Although the total extent of refund fraud is still unknown, most efforts are still focused on the detection of fraudulent returns based on identity theft. Whether a fraudulent return is an individual attempt or part of a broader scheme, IRS officials do not systematically track characteristics of known identity theft returns. Such characteristics include the type of return preparation (e.g., paid preparer or software), whether the return is filed electronically or on paper, or how the individual claimed a refund (e.g., check, direct deposit, or debit card).
The problem of fraudulent refunds based on identity theft was first identified by the GAO in 1994. Between 1992 and 1993, about 25,633 fraudulent returns were filed which claimed approximately $53 million in refunds. The IRS reports preventing the payment of about $29 million of those refunds. In the past twenty years, the problem has grown with technological advances. Fraudulent refunds based on identity theft currently have had several significant impacts as the IRS struggles to effectively transform processes and practices. The current losses are more than the lost revenue (tens of billions of dollars). What is desired is an invention which can prevent fraudulent refunds based on, inter alia, identity theft. Such an invention would minimize the impact of lost efficiencies in the areas of debt collection, and lower labor costs associated with identifying fraudulent returns, reduce lost revenue and reverse the loss of confidence from the U.S. Congress and taxpayers.